Cryptocurrency has long been a hot topic in the financial world of e-commerce and investment. As the world steadily moves away from traditional centralised banking systems and fiat currencies, crypto has established itself as a potential way forward. Over the years it has grown ever-more rapidly, gaining popularity, and becoming a revolutionary new form of digital currency. Adding to this is a virtually endless number of exciting innovations it can provide, along with the number of add-ons that can be built on it.
With the rise of major crypto coins like Bitcoin, Ethereum, Tether, there’s also been a rise in the markets where these crypto coins are traded. A DEX is the most common type of market for crypto. DEXs have risen to become major players in the world of economy and investment.
A DEX is basically a peer-to-peer marketplace designed to enable direct trade of cryptocurrencies between crypto traders. The services of “centralised” banks, brokers, and other financial or government intermediaries are not needed at all in this case. As such, DEX is a decentralised exchange marketplace, or DEX for short.
Many of the most popular DEXs use the Ethereum blockchain, making them a part of a rapidly growing collection of decentralised finance “DeFi” tools, also called “dApps”. These add to the considerable range of crypto finance services becoming available for traders and their e-wallets nowadays.
With DEXs continuing to boom in popularity, pushing the overall value of crypto ever skywards, so has the general amount of DeFi traders entering the crypto market. DEXs, however, remain one of the most popular and well-utilised DeFi tool of all.
Unlike a centralised digital exchange marketplace like Coinbase, a DEX does not allow trade between crypto and fiat currencies. Instead, it caters solely to the crypto market. This, however, offers certain advantages over a centralised digital exchange.
Centralised digital exchanges generally use the same system to establish prices as stock exchanges like Nasdaq, in the form of an order book. DEXs, on the other hand, are basically smart contracts. This means that prices and value are established mathematically. This is typically done with algorithms and the use of liquidity pools.
Investors commonly use liquidity pools to lock funds within a blockchain to gain rewards through interest. They also tend to play a critical role in decentralised trading by providing the liquidity for trade that centralised banks and financial services would usually provide. This is something that enables it to remove the intermediary altogether.
Another difference between a DEX and a centralised digital exchange is how the transaction history is recorded. While transactions within a centralised exchange will be logged on the exchange’s internal database, transactions on a DEX will be settled directly over the blockchain. They are also made visible to all rather than just the financial institution and their client. DEXs are also usually built using open-source code. This means that anyone with knowledge of programming can use and adapt it to create new crypto-based digital tools and add value to the blockchain. The transparency of an open-source DEX also allows for greater overall security. Everyone on the blockchain can see the code and transaction history. Personal anonymity and information are otherwise maintained. This, however, is just one aspect of the benefits that a DEX provides.
The major benefits that come from using DEX to trade crypto can easily be summarised in the following key points.
DEXs are known for offering a virtually endless range of crypto tokens. They can range from the biggest and most well-known, like Bitcoin and Ethereum, to the many obscure and random crypto start-ups that pop up with every passing day.
Ethereum has further added to the variety of choice available on DEXs. It provides crypto developers with the means to create their own Ethereum-based tokens with their own liquidity pools. Though this greatly benefits the blockchain, it is also something that traders should look out for when investing in Ethereum.
With no intermediary, DEX blockchains offer a greater level of freedom and personal control than any type of modern banking or digital currency system available to date. This also reduces the cost of having intermediary fees for various banking services.
With freedom comes certain risks though. Therefore, it is always worthwhile for traders to stay well-informed and up to date as possible when trading crypto on a DEX.
One of the greatest benefits of a DEX, and with cryptocurrency and blockchain as a whole, is the vastly improved online security that it offers.
This is largely due to traders storing the crypto funds and assets themselves in their own wallets, rather than on a company’s database or server. Simultaneously, their crypto is also on the blockchain. This decentralised method of storing and exchanging assets makes it incredibly difficult for hackers to steal crypto.
A great benefit of an open source blockchain is also the transparency that it provides, allowing for a potentially huge reduction in fraud and “counter party risk”. Counter party risk is the likelihood of a party involved in a deal defaulting on their agreed obligation.
While a DEX blockchain is highly transparent in its very nature, at the same time it also offers the greatest level of personal information security and anonymity possible. No personal information such as a KYC registration is required to trade on most of the major DEXs. All you need is crypto. However, your transactions and traded assets are still very visible on the blockchain.
Aside from its many useful tools and benefits like peer-to-peer lending, fast transactions, and greater personal security and anonymity, DEXs also offer an infrastructure for blockchain developers to build on. Anyone with the know-how can develop and add to the general growth of individual blockchains and their liquidity pools, or to the technology as a whole. Again, the transparency of a DEX prevents fraud from occurring, which includes hackers, black hats or script kiddies attempts at manipulating the blockchain’s code.
Although DEX and cryptocurrencies offer a host of benefits and opportunities, there are also several disadvantages and risks to look out for.
One of the greatest advantages of paid-for privately developed services and products is their general quality in terms of ease-of-use. Because DEXs are open source, they often have trickier interfaces that require a greater learning curve.
As always, where there’s a will, there’s a way. With a bit of effort and research, most traders can get the hang of it easily enough. This won’t necessarily always be the case. However, it’s good to expect it.
Traders that use a DEX are also directly responsible for their own crypto assets and dealings. If a trader sends crypto to the wrong wallet, it is essentially an unfixable error. There is no central authority available to correct the mistake.
Traders must also be aware of “smart contract vulnerability”, where a hacker’s smart contract attempts to exploit bugs in the code. Though this is highly rare, all one generally needs to do is stay in touch and up to date with the blockchain news and community to know what’s up and what to avoid.
Another potential trap fall that is related to the above, and to look out for and avoid when using a DEX, is impermanent loss. This results from traders pairing volatile crypto with more stable crypto in a liquidity pool.
The number of coins that are unvetted on most DEXs are vast and plentiful, with a great number of potential scams for traders to be wary of. Trading in obscure and new coins requires extensive research. You should approach it cautiously and only if you really know what you’re doing.
The most common ways that traders generally interact with a DEX to buy, sell and trade crypto is via the following methods.
The fees involved will likely vary according to each DEX and the blockchain in use. Much of the time the blockchain’s liquidity pool determines the fees using a mathematical formula. For example, the Uniswap DEX charges a 0.3 percent transaction fee split between liquidity providers.
Generally, the fees a DEX charges are nominal when comparing them to the Ethereum gas fees. Ongoing upgrades to the Ethereum network, such ETH2, Optimism, and Polygon, will likely alleviate many issues. This includes gas fees as well as speeding things up.
Trading on a DEX may be a little different for newcomers. Here are some more general tips to keep in mind.
Over recent years DEXs have emerged as a major force within the world of crypto and global economics. Most notable is how they have been a key component to blockchain technology’s rapid surge in popularity and general use around the world.
DEXs are still very new though and offer some unique and unprecedented challenges. However, these challenges have not managed to over-shadow their many benefits. DEXs are steadily drawing traders away from the older centralised banking systems.
Cryptocurrency, and the world’s markets and technologies, continue to evolve. It is highly likely that DEXs will continue to play a sizeable role in the future of global economics. They will at the very least likely remain lucrative and busy sectors of trade for some time to come. If you have an interest in trading or investing in crypto, exploring DEXs is well worth it.
Remember though, trading crypto on a DEX will place more control and responsibility over your own choices and assets than ever before. So, make triply sure you’re well informed, confident, and ready before jumping in.
DEX stands for decentralised exchange marketplace.
A DEX is the most common type of market for crypto.
Trading fees that apply to transactions and trades on a DEX.
Yes, DEXs are peer-to-peer marketplaces with no intermediaries.
Peer-to-peer refers to a decentralised communication model where every party has the same permissions and communication rights.